How to Buy a Home With a Low Down Payment

So you've been saving up for a down payment. You're getting there, but it's going to take some time. Interest rates are projected to go back up soon, but in the meantime, they have been at near-historic lows for a while now. Still, you don't want to take your chances and see your dream of homeownership slip away.

What should you do if you're about to buy a home but haven't saved 20 percent for a down payment? There are some options out there that can allow borrowers to put down less. The following are some strategies to help you buy a home with less than 20 percent down.

The basics when it comes to approval

First, you will need to provide proof of cash reserves. It's unlikely that lenders would approve any type of loan without proof of your ability to repay it, especially if you are looking to make a small down payment. Just about every lender will ask for the same things: proof of employment and income over a two-year period. Depending on your down payment, you may also need to show some evidence of savings.

Lenders also look at your income and debt ratios, and they also look at your credit. Most lenders limit new mortgages to 28 percent of gross monthly income, although this standard does vary according to different factors. In some cases, the lending institution may want to see a longer work record or additional assets.

Explore other loan options

Some conventional loans can be used to put a minimum of 3 to 5 percent down, while FHA loans require a 3.5 percent down payment minimum. Although the FHA only requires a 3.5 percent down payment, it does require an upfront premium of 2.25 percentage points on top of your loan amount .It's worth noting that the FHA does not allow for this up-front fee to be financed into the loan itself, so you will need to come up with  the cash to pay it. VA loans may also give qualified borrowers the option to purchase a home without any money down.

Considerations of making a low down payment

Using a low down payment loan does typically involve paying PMI premiums, which can add an additional $50 to $100 per month to your housing payments . However, if you put less than 20 percent down, this is usually required by the lender.

The term of the home loan and monthly repayment period could also affect your home buying plans. The shorter the term, the higher your monthly rates will be. This is because lenders usually charge a slightly higher interest rate for smaller loan terms in an attempt to offset the risk of default and make up for the lower monthly payment. You will want to take all of this into consideration when determining your housing budget, how much money to put down, and what type of loan to take out.

Other options

If you do not qualify for any type of low down payment home loan, there are other options. For example, some lenders will offer no-money-down loans as long as the loan-to-value ratio falls between 80 and 90  percent. This is where the property value is higher than the LTV.

Another option is to consider selling some assets to generate your own cash. You don't necessarily have to liquidate stocks or other investments unless they are part of your plan B. But if there is something valuable you can part with, you can probably bring a bigger down payment to the table to make the deal work.

You may also want to consider lowering your housing budget. By selecting a house that costs less, you may in fact be able to put 20 percent down. This can allow you to make the recommended down payment amount, which will keep your payments lower because you’ll be borrowing less and avoiding PMI.

Final thoughts

Down payment limitations can pose a challenge to homebuyers, but the good news is that it's becoming easier and easier to buy a house with a low down payment. The choice between renting and buying a home is more complicated than ever. In many places across the country, declining property values have made underwater mortgages—where you owe more  on the house than it's worth—more common. At the same time, conditions are perfect for homebuyers to take advantage of tremendous bargains on real estate in most markets around the country. Shopping around with various lenders and discussing your options is a great first step on your path to the exciting world of homeownership.